World’s banking system faces the JPMorgan problem

“Too big to fail” is forcing reforms of the banking sector in the US. Various reforms in Europe are also shooting at the same target, providing some separation between consumer banking and investment

By Howard Davies

The UK has decided to take action before any Europe-wide solution is agreed. The British are still members of the EU (at least for the time being), but sometimes our politicians forget that. Sometimes they simply lose patience with the difficulty of agreeing on changes in negotiations that involve 28 countries, which seems especially true of financial reform, given that many of these countries are not home to systemically important banks and probably never will be.

EU institutions have not been entirely inactive. The European Commission asked an eminent-persons group, chaired by Bank of Finland Governor Erkki Liikanen to examine this issue on a European scale.

The group’s report, published in October last year, came to a similar conclusion as the Vickers Commission concerning the danger of brigading retail and investment banking activities in the same legal entity, and recommended separating the two. The proposal mirrors the UK plan — the investment-banking and trading arms, not the retail side, would be ring-fenced — but the end point would be quite similar.

However, the European Banking Federation has dug in its heels, describing the recommendations as “completely unnecessary.” The European Commission asked for comments, and its formal position is that it is considering them along with the reports.

That consideration may take some time; indeed, it may never end. Germany’s government seems to have little appetite for breaking up Deutsche Bank, and the French have taken a leaf from the British book and implemented their own reform. The French plan looks more like a Gallic version of the Volcker rule than Vickers “a la francaise” It is far less rigorous than the banks feared, given French President Francois Hollande’s fiery rhetoric in his electoral campaign last year, in which he anathematized the financial sector as the true “enemy.”

So we now have a global plan, of sorts, supplemented by various home-grown solutions in the US, the UK and France, with the possibility of a European plan that would also differ from the others. In testimony to the UK Parliament, Volcker gently observed that “Internationalizing some of the basic regulations [would make] a level playing field. It is obviously not ideal that the US has the Volcker rule and [the UK has] Vickers.”

He was surely right, but “too big to fail” is another area in which the initial post-crisis enthusiasm for global solutions has failed. The unfortunate result is an uneven playing field, with incentives for banks to relocate operations, whether geographically or in terms of legal entities. That is not the outcome that the G20 — or anyone else — sought back in 2009.

Howard Davies, former chairman of Britain’s Financial Services Authority, deputy governor of the Bank of England and director of the London School of Economics, is a professor at Sciences Po in Paris.